Deductions for Landlords: The Home Office

Many business owners are leery of home office deductions, concerned that these tax deductions are more likely to encourage an IRS audit. The IRS claims there is no legs to this. Regardless, follow the rules and you should have no concerns.

To claim this deduction you must be active (beyond depositing monthly checks). If you consistently spend a substantial amount of time maintaining and preparing properties, you will likely fit the definition of the term “active”.

If you’ve met this qualifier you’ll also need to meet the basic home office deduction thresholds. First, you have to use the home office exclusively for your rental business on a regular basis.

Then you’ll also have to meet at least one of the following:

1. This office space must be the principle location from where you manage and run your business as a rental property manager.

2. You must have no other location from where you run the administrative end of your property managment rental business.

3. You meet tenants in this home office space.

4. You use a separate structure on your property for business.

After you’ve determined that you are eligible for home office deduction, then it’s time to look at what expenses qualify for write offs. There are two major types: indirect and direct. Indirect expenses benefit the entire home. And direct expenses benefit only the home office space. Examples of direct expenses could be painting or cleaning expenses. While examples of indirect expenses can be payments on property tax, mortgage,, and utilities, these expenses are apportioned out between the office and the rest of your residence. This percentage is normally calculated by the square-footage ratio. For example, a 2,000 square foot home with a 200 square foot office space would mean that 10% of indirect expenses (mortgage payments, utilities, et cetera) would count toward home office deduction expenses.

As you don’t want any trouble if you do get audited, you want to keep good records to prove that you were actually entitled to take the deduction and that it has been accurately reported. You should document the home office space with a diagram and/or photograph that supports your calculations. It is sensible to use your home office address on any business cards and other forms of communication and to have business mail delivered to the home office address. You should maintain a log of client meetings and other time spent working there. Records you should keep to substantiate expenses include: utility bills, property tax statements, insurance premium notices, 1098 mortgage interest statements and receipts for any other home office expenses.

Home office deductions can get complicated. Please do not consider this to be reasonable solution to the informed counsel of seasoned Seattle CPA. But this should help you gain a basic understanding the requirements of successfully claiming home office deductions.

Seattle Accountant +John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.